Talking Points

  • British Pound: Service-Based Activity Cools
  • Euro: ECB Holds Key Rate At 1.00%
  • U.S. Dollar: ISM Non-Manufacturing on Tap

The Euro surged to a high of 1.3974 as the European Central Bank talked up speculation for rate hike in the first-half of 2011, and the near-term rally in the single-currency may gather pace going into the end of the week as investors speculate the Governing Council to reestablish its exit strategy over the coming months. As expected, the ECB held the benchmark interest rate at 1.00% in March, but went onto say that the risk for inflation have moved to the upside on the back of higher commodity prices. At the same time, the central bank said that the risk for growth are broadly balanced as the fundamental developments continue to show positive underlying momentum in the real economy, and noted that the Governing Council may raise borrowing costs next month in order to ensure price stability.

However, ECB President Jean-Claude Trichet reiterated that the uncertainties surrounding the economic outlook remains elevated as the region struggles to manage its public finances, and stressed that the governments operating under the fixed-exchange rate system need to fully implement their budget-reduction plans this year as the risk for contagion intensifies. As the central bank sees scope to lift the interest rate off the record-low, the EUR/USD looks poised to make a run at 1.4000, and the euro may continue to retrace the decline from back in November as interest rate expectations gather pace. However, as the EU is scheduled to hold a special summit on March 11, fears surrounding the sovereign debt crisis could bear down on the single-currency, and the near-term rally in the euro could come under pressure as market participants continue to see a risk of Portugal tapping the European bailout fund.

The British Pound tumbled to a low of 1.6257 as the economic docket reinforced a weakened outlook for future growth, but the sterling may regain its footing going into the North American trade as investors raise their appetite for risk. Service-based activity in the U.K. expanded at a slower pace in February, with the PMI falling back to 52.6 from 54.5 in the previous month amid forecasts for a 53.7 print, and the Bank of England may look to support the real economy throughout the first-half of the year given the ongoing weakness within the private. However, as the GBP/USD maintains the upward trend from earlier this year, the exchange rate may continue to push higher ahead of the BoE interest rate decision scheduled for the following week, and the British Pound may make a run at the 2010 high (1.6456) as investors speculate the central bank to gradually normalize monetary policy over the coming months. Indeed, there could be a growing shift within the MPC as the risk for inflation intensifies, and the central bank may show an increased willingness to lift the benchmark interest rate off the record-low as it aims to balance the risks for the region.

U.S. dollar price action was mixed on Thursday, with the USD/JPY bouncing back from a low of 81.71, but the rebound in risk appetite is likely to bear down on the greenback as equity futures foreshadow a higher open for the North American market. At the same time, the greenback may face headwinds as market participants forecast the ISM Non-Manufacturing index to fall back to 59.3 in February from 59.4 in the month prior, and the slowdown in service-based activity is likely to instill a weakened outlook for future growth as it accounts for more than two-thirds of the real economy. In turn, the dollar may get battered during the North American trade, but market volatility may thin out going into the end of the week as market participants wait for the highly anticipated U.S. Non-Farm Payrolls report due out on Friday.